Tuesday, November 4, 2008

What Economic Problems will Face Barack Obama?

Readers Question: What Economic Problems will Face a New President?

Whoever wins the US presidential election, they are going to be faced with an economy in an unenviable situation. It is hard to imagine in 2000, George W Bush inherited a strong economy; low inflation, high growth, reasonable house prices and a government budget surplus. The new President will, amongst other things, be faced with:
  1. Higher government borrowing
  2. Economic recession
  3. Financial sector on the brink of meltdown
  4. External debt
  5. Current account deficit
  6. Perilous value of dollar.
National Debt. US National Debt is currently 68% of GDP (over 10 trillion dollars). This leaves little room for manoeuvre. Furthermore National debt is forecast to increase because of
  • Recession - lead to lower tax revenues higher government spending
  • Cost of Financial bailout
  • Growing costs of Medicare and Medicaid.
  • Ageing Population which will by 2018 constrain the government's tax revenue and increase pressure on government spending.
Presidential candidates like to promise tax cuts and spending increases. A new president is not going to be able to have this luxury. There is a danger of high expectations which a new president will not be able to implement.

Does That Mean Universal Health Care is Impossible?

The UK implemented free universal health care in 1945. At the time, just after the second world war, the UK was on the verge of bankruptcy. National debt was over 150% of GDP, rationing was still in place., - there was barely enough coal to light the fires. And yet, the new Labour government successfully pushed universal health care through. So when Americans say there country cannot afford universal health care in 2008, it is a complete joke.
Of course, America can afford universal health care, the difficulty is facing up to the health care insurance firms who make high profits out of the current skewed and inefficient system.

Economic Recession

It is the real economy which will affect average Americans. The problem is that 2009, will prove a difficult year no matter what the President and monetary authorities do. Confidence has collapsed. Every sector of the economy is experiencing problems. The big issue is how long and how deep the recession will prove to be. The problem is that with government borrowing already at critical levels, it is more difficult to justify another wave of expansionary fiscal policy. Whatever problems the US currently has, they will be exacerbated by an economic recession.

Financial Sector

The problems of September / October seem to have been temporarily avoided. But, it is difficult to know whether this will prove a temporary respite or whether the economic recession, and rising unemployment will tip more banks over the edge into approaching the government with a begging bowl. See: Financial Crisis explained

Legacy of Debt

The personal savings rate in the US has fallen to below 2%. Personal borrowing has increased to record levels. However, the mood has changed. Consumer spending is falling by 3%. One of the largest falls for many decades. A new attitude of frugality is likely to emerge. The US economy will not be able to rely on consumer spending and borrowing to finance unsustainable growth.
See: Debt in US the legacy of Bush

The Once Mighty Dollar.

Despite recent increases in the dollar, its value is perilous due to
  • current account deficit
  • External debt. - 25% of national debt is held by foreigners e.g. China. This makes Dollar vulernable to any sell off.
  • Increasing National Debt is increasing pressure to increase the money supply. This inflationary option could devastate the value of the dollar. Although inflation seems a remote possibility at the time of recession. National debt will need to be kept under control for a while.
  • See: Could Dollar collapse?
See also:

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